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Why Stock Predicting AI Will Never Take Over the World

Traders Magazine Online News, August 13, 2018

Matt Wright

‘I am he as you are he as you are me’

This is the first line of The Beatles’ song ‘I am the Walrus’, a song deliberately written to make no sense in order to satirise the over analysation of their other lyrics.

Predicting the predictable causes the predictable to become unpredictable

A sentence which, at face value, seems to be as incoherent as the previous one, but let me explain to you why it isn’t.

AI, or more precisely machine learning (ML) is taking over the world.

ML models can be done with minimal coding knowledge, and are able to churn out some stunningly accurate results, and hence are used in a whole range of different industries.

People are always looking for new models to make as all you need to create one is a large set of, preferably numerical, data and a computer. Where can you find a huge collection of numbers? The stock market.

It is not only the availability of data that makes this particular usage of ML appealing, there is a vast amount of money to be made in the industry, so anyone who could effortlessly anticipate movements would surely make billions. Or would they?

The Predictability Paradox

Let’s start with a story.

In a post-Brexit UK (sorry), government is unstable and rebellions are rife. The current leader can only hang onto power if they are able to predict, and successfully quash these uprisings.

To do so they employ a computer scientist to build an ML model. Based on ten different factors, the algorithm can predict, with 100% accuracy when the next rebellion will start.

The Prime Minister tries it out and it returns a date exactly 3 months from now.

Parliament could fight it, but the odds are slim, so instead they put in measures for damage limitation. Taxes are lowered, more money is pumped in the welfare system, and arrests of potential leaders are made.

When the day comes, the army are ready and waiting in Westminster. But nothing happens. No opposition comes.

Fuming, the Prime Minister goes to the computer scientist and explains how his algorithm is totally wrong

‘There was no revolt because I predicted there would be’ the man replies.

Predicting the predictable causes the predictable to become unpredictable

There is a name for this sort of occurrence. A Level Two Chaos Event (L2CE).

Crucially, an L2CE reacts to predictions made about it.

Take a scientific experiment. A biologist is estimating how tall a plant will grow. This is an example is Level One Chaos, the plant does not hear this prediction and deliberately try to subvert the scientist by not growing at all. Level One Chaos events do not react to predictions made about them.

The scientist may guess wrong, but there is no chance that he guessed correctly, and then because of this, the estimate became wrong.

Rebellions are Level Two. When one is predicted, the world, or in this case government, reacts to this estimation, and hence makes it wrong, or at least tries to.

The stock market is another example of L2CE.

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